Which recovery and what capital?

27th March 2009 By: Seeraj Mohamed

There are different official responses to the global economic crisis in the US and Europe. The US has accused the Europeans of not providing enough economic stimuli. The Europeans argue they have done enough. We should explore these differences because the South African government is formulating its own response and programme to respond to the crisis.

The US is spending a huge amount of money on an economic stimulus package. Much of the US package will be spent on improving and upgrading infrastructure. The state’s investments could have significant implications for productivity and global competitiveness of the US economy.

Further, the Obama administration has added a strong environmental component into the programme that is geared towards reducing the amount of carbon produced in the US and that will have other environmental benefits. This programme is relatively labour intensive and is aimed at creating hundreds of thousands of jobs.

There will be a focus on retrofitting government buildings, schools and hospitals to improve their energy efficiency and to reduce their environmental impact. There will also be an emphasis on switching to renewable energy sources such as wind and solar power and biofuels. The advantage of these programmes is that they have a positive combination of state infrastructure improvement, job creation and fiscal economic stimulus. Some economists have argued that the US stimulus is not large enough to offset the damage and unemployment from the global economic crisis.

However, the US government budget deficit has grown to twelve percent of their gross domestic product. In order to keep spending they need to keep borrowing. There is a well recognised danger that the US’s recovery may be pulling too much global capital into the US. The rest of the world could end up without enough capital for their recoveries. Developing countries could end up lending money to the US rather than adequately dealing with their own economic problems.

The Europeans have cut interest rates and invested in job creation and other stimulus. However, they feel that they have to address the financial crisis. They disagree with the US that they should be spending more on economic stimulus. A central argument in Europe is that they have a much more progressive social welfare system that supports their citizens.

The Europeans now have the global economic crisis to offer as a response to the criticisms of the US about the inefficiency of the European countries’ approach to labour market regulation and unemployment benefits.

The Europeans have a higher social wage and take better care of their citizens than the US. They are also bailing out their industries and supporting job creation. There is a lot of money spent on keeping their economies afloat and to reduce the number of jobs lost. The European countries are also competing for scarce global capital.

South Africa has a huge unemployment problem. I argue that it is a crisis that predates the global economic crisis. Today there is a global crisis where all sectors of the economy are contracting and even more jobs being lost. We should already have had a massive economic stimulus and support for industry, especially downstream, value adding, employment creating industries. At the same time, we require more of the social protection that the European countries provide their citizens. The value of these protections is now better understood in a world where financial and economic crises have become more frequent. We can learn a lot from both the US and European cases. However, we may struggle to raise sufficient capital in global markets to support our recovery programmes. South Africa and other developing countries should loudly voice concerns about availability of global capital for recovery programmes to the leaders of the developed countries.